Skip navigation

A capital success in D.C.

The metropolitan Washington, D.C., commercial real estate market is as diverse as its geographic breadth and business niches, yet is strongly cohesive in its economic stability and growth potential heading into the next century.

"Washington's real estate market remains one of the nation's strongest," says Andrew J. Genova, managing director in the Washington office of Dallas-based Trammell Crow Co. "Given the state of the region in the early 1990s, its transformation has been extraordinary. Last year reported the best results in more than a decade; 1999 is likely to mirror that performance."

Office market Washington's office market totals 220 million sq. ft., according to Delta Research, a Washington-based Transwestern/Carey-Winston company. Last year ended with a healthy 8% vacancy rate overall; 1999 will be as hot or hotter thanks to record job growth and continuing consumer confidence.

While Northern Virginia's booming technology-based market is certainly noteworthy, downtown Washington's resurgence due to factors such as the Finance Control Board, a federally-appointed board of supervisors that oversees the city's finances, and the election of mayor Anthony Williams has set the stage for continued renewal of submarkets long ignored.

"The initiation of enterprise zones, the creation of 'NoMa' - a high-tech area north of Massachusetts Avenue NW - the development of the new convention center and a much needed focus on schools are just some of the efforts underway," Genova adds. "Their effect on the District's image has already taken hold. These factors together will help enable the city to regain its position as the region's hub."

Although suburban Maryland is a much smaller market than the District or Northern Virginia, the area should not in any way be considered the poor step-child of the region. "While this market has not had the tremendous expansion of Northern Virginia, it is stable and well-credited with companies such as IBM, Xerox and Marriott," says Larry Thau, executive director in the suburban office of New York-based Insignia/ESG. "Many high-tech and health and human services companies feed off the proximity to agencies such as the Small Business Administration and National Institute of Health. The companies here are much more conservative tenants - it's just a totally different market that does not compete with the younger firms heading to Virginia."

In 1998, the Washington metro region added more than 72,000 jobs, a pace not seen since the 1980s. According to U.S. Labor Department statistics, the number of new positions ranked the region fifth in the country with a 7.5% increase in job growth from the previous year. Because many of those jobs were in Northern Virginia, that area ranks third behind Tucson, Ariz., and Austin, Texas, in national job growth with a 9.6% increase.

At the same time, state governments are offering more incentives to attract or retain companies. Maryland recently spent $44 million to keep Marriott from leaving the state. Virginia offered America Online Inc. (AOL) a state and local tax incentive package worth $7.5 million annually.

With that incentive package, AOL will build a $520 million technology center in Prince William County, Va. AOL purchased 25 acres at Battlefield Business Park for the 220,000 sq. ft. technology center. The Internet service provider also is constructing two new buildings valued at $80 million at its Dulles, Va., headquarters. The two new headquarters buildings will total 400,000 sq. ft. and eventually house an additional 1,200 employees.

"The clear sign of the times in Northern Virginia is the explosion of Internet and telecommunications businesses locating in and around Dulles International Airport, which really is the gateway to the world's capital," says Gregory Hamm, managing director in the Virginia office of Los Angeles-based CB Richard Ellis. "Washington is important to the regulation of these companies. The Pentagon has been involved with the Internet virtually since it began, and government contracts continue to grow in Northern Virginia. It is the perfect location for such firms."

According to Delta Associates, the Northern Virginia office market totals 92 million sq. ft., has a vacancy rate of about 4% and few available large tracts of land. That vacancy rate may rise in the next year as 7 million sq. ft. of office space comes online. However, much of that space is preleased.

Nor is this a market which has reached its potential. Construction activity is now leapfrogging over Dulles Airport, although Loudoun County would like to see such commercial development stay east of Route 15. As far as jobs go, Northern Virginia's employment base is expected to grow by 40,000 jobs each of the next five years. "All this growth means that one of the challenges of the near future will be whether there will be adequate residential available," says Hamm.

Joining AOL as a leader of the pack is MCI WorldCom, which is building 2 million sq. ft. for its headquarters in Loudoun County - a project expandable to 7 million sq. ft.

"These two companies are emerging as the preeminent players worldwide, and for Virginia that means they are attracting a lot of business to the region," says Paul R. Adkins, senior vice president for Washington, D.C.-based CarrAmerica Realty Corp. "The outstanding office market in the Reston-Herndon-Dulles corridor is no coincidence."

Many suburban buildings are in the three- to six-story range with high parking ratios. Other companies with projects underway here include Orbital Corp., which plans to build a 250,000 sq. ft. development in Loudoun County. Nextel Corp. also is taking two buildings in Reston, as is Cable and Wireless Corp. According to Hamm, Teleglobe - the equivalent of AT&T in Canada - took 150,000 sq. ft. in Reston and is now looking for more. "Often, companies are growing beyond what was reasonably planned," he says.

With an 81-million-sq.-ft. downtown office market, Washington enjoyed a banner year in 1998, and, looking ahead, the same should be in store throughout 1999. The market is dominated by the development of trophy class high-rises commanding full service rents as high as $60 per sq. ft.

"Washington has a 15-year-low vacancy rate of 3.5%, which is fueling new development," says Trip Howell, senior vice president in the District office of Northbrook, Ill.-based Grubb & Ellis. He adds that the legal community in the District has fueled the city's resurgence. "Regulatory work is up after six years with a Democratic president, and all the Northern Virginia technology business has lead to a huge high tech legal community here. It is also in vogue to be downtown."

The jump in trophy-class construction has meant trickle-down success through the ranks of office space and rent spikes in every market. The Class-A market is nearly full, the Class-B vacancy rate is in the high single digits and Class-C space - once 25% vacant - now is in the low teens.

"The rents are a condition of supply and demand," Howell adds. "But things are different this time. Between 1991 and 1992 there was 5 million to 7 million sq. ft. of space being delivered, but now there is only as much as 2 million sq. ft. delivered in a year."

In the first quarter of 1999, absorption totaled 1 million sq. ft. in the District, adds Peter Brohoski, head of brokerage services in the downtown office of Insignia/ESG. To date, downtown also has more than 710,000 sq. ft. delivered in 1999. All the products in Washington are rehab projects - no new property is available. Projects such as 233,400 sq. ft. 1909 K St., 249,922 sq. ft. 600 14th St. and 227,206 sq. ft. 1825 Connecticut Ave. have all been delivered this year.

"The law firms are where the growth is here, but tech firms are the biggest surprise entry into Washington while government is also looking for good deals," says Brohoski. The local government is trying to funnel tech company activity in the city to the NoMa area of the city - an underused, logical in-fill area of North Massachusetts Avenue where former warehouse space is being renovated.

Quest Fiber Optics is one such company heading to NoMa in 2000 - the firm has leased 100,000 sq. ft. at 1500 Eckington. Lucent Technologies also has leased 96,000 sq. ft. at 655 15th St., and Virginia-based SAIC, a high-tech government contractor, has leased 60,000 sq. ft. on Vermont Avenue.

All of the District's submarkets are doing well in part because of the stabilizing factor of government leases and projects such as the new convention center, which is slated for completion in 2002.

"The MCI Center has also been a real catalyst for activity," Brohoski adds. The arena has contributed to the East End's successful regentrification, attracting long-dormant residential development, he says.

The area in and around 7th Avenue already has about two years of new activity under its belt. With the convention center added to the area, hotel development is also on tap. A Courtyard by Marriott is going in at 900 F St., and The Ritz-Carlton is under construction at 2200 M St. There are also three hotel sites adjacent to the convention center.

Suburban Maryland's office market totals 45 million sq. ft., and although much smaller than its regional counterparts, the size in no way diminishes its vitality. According to New York-based Cushman & Wakefield, some submarkets report vacancy rates below 5%. The area's overall vacancy rate during the first quarter of 1999 dropped a full point from the end of 1998 to 7.4%.

"There are many examples of Maryland successes," says Brian McVay, senior managing director at Cushman & Wakefield.

In Bethesda, the 296,000 sq. ft. Francis G. Newlands building should deliver later this year. Developed by The Chevy Chase Land Co., Chevy Chase, Md., the building is 95% preleased with rents between $32 and $36 per sq. ft.

Also in Bethesda, Chevy Chase Bank is taking 300,000 sq. ft., nearly half of the Hot Shoppes site being developed by Bethesda-based Farr-Curtis & Associates Ltd. for delivery in December 2001. Site prep work has already begun on the 675,000 sq. ft. high-rise, which has 150,000 sq. ft available.

These might be the last new developments for a while in Bethesda, however, as Montgomery County officials this spring called for a moratorium on approving new commercial development in Bethesda's CBD until traffic woes can be rectified.

"All of a sudden it is a very different picture for suburban Maryland developers who have to look two to three years in advance for delivery of properties," says McVay.

Industrial The Northern Virginia industrial/flex market has a base of more than 60 million sq. ft. and closed out the first quarter of 1999 with a 4.4% vacancy rate. The steady activity - coupled with 1.5 million sq. ft. net absorption through 1998 - should continue this year. Rental rates also jumped 10% last year, surging to an average of $8.27 per sq. ft. triple net, according to brokers at Trammell Crow.

"In the early-1990s, warehouse space leased for more than $3 a sq. ft., and now that same space is going for $6.50 per sq. ft.," says Edward "Bert" Harrell, vice president with CB Richard Ellis. "And the rates coming up have justified new development."

Growth in Northern Virginia's flex market also has attracted tech companies and others needing back-office space. And while both speculative development and build-to-suits are taking shape, Harrell expects more build-to-suit activity in 1999, especially in the Dulles South submarket. While more industrial and flex space construction is taking place now and planned for the near future, "We won't see the overbuilding of the 1980s. We started to see delivery of new product here in late-1996 and 1997 - the first since the 1980s," Harrell says. "Today there are fewer players keeping the market in line. People are also waiting to see how the building next door leases before they break ground on something new."

A number of projects are planned for the coming year, Harrell adds, particularly around the Dulles area where company activity from such major players as America Online and MCI WorldCom spurs growth. The market boasts growing technology infrastructure and has land more readily available than in the close-in suburbs.

Among projects scheduled for delivery this year are a 78,671 sq. ft. building and a 456,000 sq. ft. redevelopment in Springfield, Va., both of which were completed this spring. "Loudoun County is the third fastest growing county in the country right now, and between the businesses and the well-heeled consumers, service businesses also want to be there," Harrell says.

Suburban Maryland's nearly 20 million sq. ft. industrial/flex market absorbed 131,837 sq. ft. through 1998, which is more than twice the growth recorded in 1997. The area's flex market has been attracting attention from companies fleeing the tight office market, especially in the biotechnology field.

Retail The same trends affecting the office and industrial sectors - rapid job and population growth - also are driving a healthy retail sector.

"The whole corridor is smoking," says Peter Framson, principal with Trammell Crow in the Tysons Corner, Va., office, as retailers continue to vie for prime locations throughout the region's ever-tightening shopping corridors. Many big-box chains are developing in-fill properties across the region. Other retailers are coming to the Washington area with the idea that higher land or lease costs are worth the eventual return.

"There has been a feeding frenzy by big retailers to get into specific locations," says Framson, adding that new retailers looking to come into the market are now creeping in slowly because of space constraints.

"This retail market is being slowed by outside constraints such as the lack of land availability or vacant spaces," he says. "Land or locations with vacant space are gone almost before the sites become available. Some retailers are heading first to secondary and tertiary sub-markets because that is where they can get a foothold."

This year, the region is seeing the fruition of several years of planning and construction. Big-box retailers such as Target, Wal-Mart, Galyan's and Home Depot are aggressively looking for additional sites. Power centers continue to be built and quickly leased as they follow residential and other commercial development. Even new or redeveloped malls continue to come on line and take shape on developers' drawing boards.

"These big retailers are focusing on areas in the region that will have immediate profitability for them once they open," said Eddie Goldmeier, vice president of H&R Retail in Towson, Md. "We are seeing a real cross section of retailers looking at this market. I think everyone in general appears to be on an expansion kick."

Among this year's new retail product is North Bethesda, Md.-based Lerner Enterprises' new 1.2 million sq. ft. regional mall, Dulles Town Center. The mall's grand opening is not until August, but anchors Hecht's, JCPenney, Lord & Taylor and Sears are already open, as well as 20 to 30 smaller stores.

Dulles is also being tapped for Dulles Town Crossing, a planned 850,000 sq. ft. power strip, which should break ground during the fourth quarter. Power centers from Birmingham, Ala.-based AIG Baker are also in the works in Manassas, Va., and Frederick, Md.

Northern Virginia's healthy commercial and residential development over the last several years often marks retailers' first stop when entering the region. There, retail growth is catching up to outlying residential growth, particularly in Prince William and Loudoun counties as well as in western Fairfax County.

In the former Caldor's in Fairfax, Va., the region's first Home Depot Expo, a 91,000 sq. ft. home design center, is expected to open this month. Home Depot would probably like to add more stores here if they could find locations, Framson says.

Others have been quick to grab the vacant Caldor locations as well. Kohl's is opening later this year in former Caldor stores in Severna Park, Md.; and in Herndon, Va. At Seven Corners in Arlington, the Caldor is now a Sears. Former Best Products locations are also being gobbled up, and similar scenarios are likely to take place with closed Service Merchandise and MJDesign stores.

Entertainment centers are a popular and growing concept in the region as well. Westview Park Corp. is expected to break ground later this year in Frederick on a 200,000 sq. ft. entertainment center, including a 16-screen, stadium-seat movieplex and several restaurants.

Retail development is not just something for the suburbs, as Starwood Urban Investments LLC is now proving. The company formed in 1998 to acquire undervalued urban properties with a strong retail component.

"Downtown Washington is one of the most under-served markets and best opportunities for urban retail," says Robert S. Wennett, Starwood principal and president. "Washington is the number one focus for us. We are paying good prices for properties, but getting a good return on our investment. We are projecting rent spikes here."

Starwood has a six-property, $50 million portfolio in Washington and expects to double its holdings by 1999 by expanding to the suburbs. "We would like to have a $250 million portfolio here in the next 24 months," Wennett says.

Multifamily The booming economy has left its mark on the Washington area's multifamily housing market as well, with the increased number of jobs and people needing apartments yielding record rental and sales prices per unit.

The Class-A apartment vacancy rate across the region stands at 1.9%, the lowest level since World War II, but developers will deliver 17,218 units during the next three years. With additional product now in the pipeline, the apartment vacancy rate will likely creep up to 4.3% by spring 2002, according to Delta Associates research.

According to a first-quarter 1999 report from Delta Associates, the metro area gained 68,000 jobs, which fueled the absorption of 4,655 new market-rate apartments in the 12 months ending in March. The same period saw the delivery of 5,377 units metrowide, with nearly 4,000 deliveries in Northern Virginia.

Land prices also rose throughout the region in 1998, jumping 8% to nearly $19,000 per unit for garden apartments and $17,000 per high-rise unit. A first indication that prices are still increasing in 1999: during the first quarter, a garden site sold for $17,349 per unit.

The most pent-up demand may be in downtown Washington, where fewer than 400 Class-A units have come into the market since the early 1990s. The industry is responding, however. In the next 18 to 36 months, five high-rise projects with 704 units will be completed.

In D.C.'s downtown, The Lexington, an 86-unit high-rise by Boston Properties/Gould delivered last month with 36 units preleased. Also, Arlington-based C.E. Smith Companies has a 142-unit high-rise under construction and set for completion next April.

Northern Virginia currently has a tight apartment market and the most product in the pipeline. Projects now under construction in Herndon, Lorton, Sterling and Arlington expect to deliver 1,383 units before the end of the year, according to Delta Associates. Throughout Northern Virginia, 16 apartment projects are under construction with 5,183 units scheduled for delivery between this month and February 2001. Many of those units are being built just east of the airport in Dulles - five of the buildings are in Herndon, one in Reston and one is in Sterling.

Suburban Maryland is busy as well, although growing more gradually than the Virginia market. The smaller, suburban Maryland market has a 2.1% apartment vacancy rate.

In Maryland, 1,238 units were absorbed in the last year. There are 10 projects under construction in suburban Maryland totaling 3,014 units. Four of those projects expect to be leasing by year's end with 1,295 units. The prime area for new apartments in Maryland is the I-270 corridor between North Bethesda and Gaithersburg, with two projects in Gaithersburg, two in Rockville and one in North Bethesda. Between now and March 2002, suburban Maryland expects a total of 7,041 new units delivered.

Overall, Washington, D.C., commercial real estate sectors thrive as job growth spurs office, retail, flex/industrial, residential and multifamily development from Maryland to Northern Virginia. With the region's transformation since the early-1990s, metro D.C. stands poised to continue its resurgence as high-tech companies continue to expand in the area, often with large office and flex requirements for Washington's CBD and the surrounding suburbs.

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish